Tackling IPO scams: Sebi needs to carefully build case

TNN|

May 01, 2007, 03.21 AM IST

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It is in the nature of stock markets that they can never be entirely immune to scams. And it is the nature of rising markets that scams occur more frequently than desirable. This is where the role of regulators comes in. Proactive regulators who are on the ball and quick to nip market irregularities in the bud can do a great deal to ensure market integrity. The Securities and Exchange Board of India's (Sebi's) latest order banning seven entities from trading in stocks till further orders must be seen in this context. A careful reading of the 13-page order by Sebi whole time member, G Anantharaman, on the conduct of these entities establishes strong, prima facie, reason to suspect their bona fides.

Thus, acts like the placing of abnormally large orders at way below market price by parties whose ability to put through the transactions was at variance with their disclosed sources of income or instances unusual market behaviour as in revealing the entire order at one go rather than staggering the amount, as is the common practice, are bound to arouse the suspicion of any regulator.

The order should deter scamsters since it shows that Sebi is alert and on the ball. However, mere suspicion, however strong, does not establish guilt. Consequently, though we applaud the capital market regulator for its attempt to keep the market clean, it has work to do. The mere fact that the prices of the scrips in question flared up on the day of listing or that the brokers in question were found indulging in 'abnormal' behaviour does not establish mala fide intent that will stand the test of law. In which case, Sebi may once again be placed in the position of having its ruling set aside by the appellate body, SAT.

Of course, the order is only an interim one. Sebi can try and establish guilt before it passes the final order. It also appears to be suo motu in the sense that Sebi has not given the parties concerned a chance to respond. We are all for maintaining market integrity; but it would be better if Sebi went by the normally accepted code of 'innocent till proved guilty' and gave a fair hearing to all concerned before it reads out the riot act.